The Monetary Union proved to be bad for Europe, for the idea of the European Project. Member states abandoned sovereignty as they cannot print money. They transferred financial and political independence to European Central Bank. It was a bad idea, anyway, as there wasonly monetary but not fiscal union. And now we have the price: Greece is forced to collapse, the next Eurozone “rebels” could join the queue.
“Introducing the Euro was a mistake,” says Richard Werner, a German, Professor of International Banking, the economist who proposed the term quantitative easing.
Prof. Werner suggests that “all Eurozone countries should exit the Eurozone to show solidarity with Greece. This [euro exit] can be done by simply reversing the procedures of introducing the euro.”
What should be done about Greece and what’s likely to happen
“The other half of the chief economists, like me, recognised that a single currency would be introduced, no matter how nonsensical the economics, since it was a political project. (The economics being bad, the politics was even worse: the end of democracy in Europe). They agreed with me that it was going to be a disaster. I asked the chief economist of what was then the fourth largest German bank: “If you think so, why don’t you speak up about this? You are forecasting gloom and doom, but I don’t see any reports by you or your bank about it.” His answer was shocking: He said that there had been clear instructions from the boards of all the large German banks to their staff that no report on the abolition of the D-Mark and the introduction of a European single currency that was in any way negative was allowed to be published. The economists in the private sector had been muzzled by their bosses. The same I heard from journalists. So the German media only quoted the rigged reports from the banking economists.
As I warned in my 2003 book Princes of the Yen, in the event the European Central Bank was to exacerbate matters greatly by creating massive credit bubbles, banking crises and recessions in its first decade of operation. The ECB then ensured a prolonged crisis by not ending these banking busts, such as in Ireland, quickly and without costs to the tax payer (as central banks are uniquely able to do). Instead, the ECB forced governments to incur massive national debts to rescue their now defunct banking systems. This way, Ireland moved from fiscal poster boy to virtual default, needing an IMF ‘rescue’.
And this, coupled with excessive consumption and spending during the boom years, is how Greece got into its current predicament.
So it is high time to recognise that the introduction of the euro was a mistake. It is time to cut our losses, instead of throwing good money after bad. Eurozone countries should therefore now show solidarity with Greece and all exit the eurozone together. This can be done by simply reversing the procedures of introducing the euro.
By abandoning the euro, each country would regain control over monetary policy and could thus solve their own particular predicament. Some, such as Greece, may default, but its central bank could limit the damage by purchasing the dud bonds from banks at face value and keeping them on its balance sheet without marking to market (central banks have this option, as the Fed showed again in October 2008). Banks would then have stronger balance sheets than ever, they could create credit again, and in exchange for this costless bailout central banks could insist that bank credit – which creates new money – is only allowed for transactions that contribute to GDP in a sustainable way. Growth without crises and large-scale unemployment could then be arranged.”
(full article in Werner’s blog here) – Excerpt published on KTG with author’s permission.
Richard Werner is professor at the University of Southampton. He proposed the term quantitative easing, as well as the expression “QE2” referring to the need to implement true quantitative easing as an expansion in credit creation.
PS The idea is not bad. In fact, it is radical and very welcome. However, watching the Euro finance ministers’ statements before the Eurogroup meeting, I hardly believe that any EZ member state government would dare follow such a solidarity action with Greece or with any other EZ member state. Unless some Euro-hardliners go for a long, long vacation.
Yet, it is interesting to see that not only UK’s economists slowly realize the need for change. Maybe politicians will follow – and one day reform this arteriosclerotic institution called European Union.